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What is subprime lending?


Subprime lending is the term used for mortgages made to borrowers with poor credit histories. Banks typically prefer customers with strong track records of repaying debts in full and on time. They may be willing to lend to borrowers with sketchier repayment histories but will charge them higher interest rates to compensate for the extra risk of losing some of the money they lend them and for the extra work that may be involved in chasing them up for the cash.
If the term “subprime lending” sounds familiar, it’s because it was the culprit in the housing crisis that began around 2006 and, based on the persistently low prices of homes and the high number of foreclosures still occurring, is still around. The collapse in home prices, in turn, was responsible for the credit crisis that culminated in 2008. Today subprime loans account for only about 2 percent of the mortgages being made. That’s a sign that lenders and borrowers have learned their lesson or else that the fragile state of personal and bank finances have left them no choice but to behave more sensibly.
-Conrad de Aenlle